Buying a home is probably the most expensive investment you will make in your life, so how you pay for it is a monumental decision. There are so many products available to home buyers, you really have to do your homework before deciding on one mortgage.
Here's what you need to know when shopping for a mortgage for your new piece of real estate:
Know your credit report and credit score. Yes, this number is really important. It affects the rate and amount you get to borrow or if you qualify to borrow at all. Start by getting a copy of your credit report and get your score if you are even thinking of buying real estate. Things that bank looks at on your report are, number of open accounts, amount of available credit, late payments, paid off accounts and on-time payments. Go through and close all accounts you don't use, resolve what issues you can and don't open any new accounts until or after the mortgage is secured.
Know your finances. Before you apply, know what you can afford to pay each month by going over your budget. Think about your future finances as well. Do you know that you will be getting a yearly raise or is a promotion on the horizon? Future financial gains may affect how much you can afford and what type of loan may work best.
Know your options.
1. Conventional loans- This loan allows you to lock in to a rate and sets your payments up for a 30 or 15 year period. If you plan to stay put, this is a fairly a no-risk option.
2. Adjustable Rate Mortgage (ARM) - Many banks are offering ARMs these days. This type allows you to take out a loan at a low rate. There is usually an option of 3, 5, or 7 years to lock in this rate. After this time is passed, your loan is at the mercy of market rate changes. If you know you will be moving in 3 years, this type of loan may be a good for you. However, realize that your payment will go up at some point and budget for this spike. Just because that initial low rate allows you to afford a certain home, you have to consider the long term financial commitment so that you don't get into trouble.
3. Interest-only loans- This type is exactly what it says. Your payment is on the interest only. It may allow you to afford the home, but in the long run, it may not be a good idea. If you decide to sell at some point, you will find that you have no equity in the real estate property and if market values have fallen, you will owe more than it is worth.
Know your terms.
1. Mortgage rate and APR- The mortgage rate is what the bank is offering on your loan. The APR is the actual rate you will pay after fees.
2. Discount Points- you can buy these to reduce your APR and the amount of fees.
3. Private mortgage insurance (PMI)- this is tacked onto your payment if you don't have a 20% down-payment as a protective measure for the lender; in case you default on your loan.
4. Escrow- also added to your final payment. This account is for paying the taxes and insurance on your real estate property throughout the year.
Know what documents you need. Gather all W-2s and tax returns for the past couple of years; several months back pay stubs, bank statements of the past couple of months. You will need all of these as proof of income when you apply.
As you can see, there are a lot of things to consider, when financing real estate. If you have a hard time putting it all together, don't be afraid to ask questions to your lenders or get a financial planner to help you to work it out. The most important thing is to arm yourself with knowledge and carefully consider all of your options before jumping into this monumental financial commitment.
